Earlier this month, the Securities and Exchange Commission (SEC) issued a no-action letter indicating the staff of the Division of Trading and Markets would not recommend enforcement action if an “M&A broker” were to engage in the transfer of the ownership and control of a privately held company through the purchase, sale or transfer involving securities or assets of the company, to a buyer who will actively operate the company or the business conducted with the assets of the company, without registering as a broker-dealer.

An M&A broker may not:

  1. have the ability to bind a party to an M&A transaction described above;
  2. provide financing for the M&A transaction;
  3. have custody, control or possession or otherwise handle funds or securities issued or exchanged in the M&A transaction; or
  4. facilitate an M&A transaction with a group of buyers if the group was formed with the assistance of the M&A broker.

The buyer in the M&A transaction may not be a passive investor. The buyer must acquire control and actively operate the company or the business conducted with the assets of the company. Control may be acquired through the ownership of securities, by contact or otherwise. Control is presumed to exist if the buyer or group of buyers has the right to vote 25% or more of a class of voting securities or in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.

For purposes of the no-action letter, a privately held company is a company that does not have any class of securities registered or required to be registered with the SEC under the Exchange Act or is required to file periodic information, documents or reports under the Exchange Act. There is no size limitation with respect to a privately held company under the no-action letter.

The no-action letter is limited to broker-dealer registration under the federal securities laws and does not preempt or otherwise override state laws. In addition, HR 2274 is under consideration by the U.S. Senate, after being unanimously passed by the U.S. House of Representatives, which would exempt M&A brokers from registration as a broker-dealer. Certain provisions of HR 2274 are contrary or inconsistent with the SEC no-action letter, and the SEC would be required to revise the conditions and prohibitions set forth in the no-action letter if HR 2274 were to be enacted into law.